New FinMin rule eliminates the double taxation of options
So in the best tradition of muck raking and dirt digging, I begged around the office to see if anything of import had occurred during my absence. Fortunately, my colleague Andrzej Taudul had dug up a good tax issue for me to tell you about. This meant that my usual laborious research process didn't have to take as long as usual, and so I should be able to avoid grief from the editor.
Now usually upon returning from holidays, I am simply brimming with ideas, having had a chance to laze about and do nothing but think of new tax treatments for transactions. But this year was different. I say holiday, but with a one-year-old kiddie it's really just a case of looking after him somewhere else rather than having a break, and as it was Kasia's holiday too, then her idea was that I'd spend time looking after Alex. Those of you who have been readers of Tax Watch for a long time know that I like to return from a vacation with a good juicy tax issue or two, but somehow this year there just didn't seem to be any.
Instead, I returned to find some good news on the subject of stock options. Those of you with good memories will remember the extensive series of columns last year on this subject, and the conclusion that if things weren't structured properly, then people receiving stock options could be subjected to double taxation.
The problem can be explained as follows (the eagle-eyed anoraks among you will note the cut-and-paste from my previous column on this subject):
At the date the options are exercised, the option holder goes out into the market, and exercises his right to buy shares today at a price set some time in the past (let's say for simplicity that he buys for 100 when the current market price is 200).
At that point, you've had, by reason of your employment, a benefit in kind by being able to buy shares at preferential price. The valuation of a benefit in kind is the market value at the date of receipt. So by being able to buy for 100 something with a value of 200, you have the difference (or 'spread' in option speak) as taxable income.
Subsequent to the buying of shares, at some point the individual will sell the shares, and maybe realize the capital gain. Here again we have a small tax issue to sort out. The gain on the sale is calculated by deducting cost from proceeds. To go back to our previous example, if the shares are sold for 300, then the gain is 200, being 300 minus the cost of 100.
This leads to double taxation of the 100 of the gain that was already taxed on purchase. The discount was taxed at the time of purchase, but as the law currently stands there is no mechanism to take that into account at the time of selling, and so tax is paid on the discount twice. Until now that is.
Under a new ordinance from the Finance Ministry, the collection of the tax on the discount at exercise has been abandoned for income arising in 1999. This means that the income will only be taxed at the time of sale, and further, that the discount will only be taxed at the time of sale.
There is a condition that this option income must arise from the issue of shares under a resolution of shareholders, but in practice this is almost always the way this would happen in most issuing jurisdictions. (I'm hedging a bit here in case there is a country where it is possible to issue shares without the other shareholders approving the issue, but I can't off-hand think of one).
This welcome change brings Polish tax law into line with most other countries that have special rules for the tax treatment of stock options, none of which tax twice. At the moment, there are still no special incentives to remunerate people in the form of options, but at least taking away the disincentive means that the system continues to improve.
Trying to encourage people to improve the performance of the share price of their employer company by offering incentives to take some remuneration in the form of shares is still some way off. And that's assuming that this continues to be thought of as good practice, rather than encouraging management to do strange things such as borrow money to buy back shares to increase the share price as seems to be happening in other economies, but that's not a tax issue for this column I think.
The ordinance is valid so far only for income arising in the 1999 tax year, which means it is effective back to Jan. 1. It seems likely that this will appear in the law itself next year, which would be even better.
It's not often that I find an opportunity to be positive and uncritical without any cynical side comments, but I think this time it's deserved.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
Now usually upon returning from holidays, I am simply brimming with ideas, having had a chance to laze about and do nothing but think of new tax treatments for transactions. But this year was different. I say holiday, but with a one-year-old kiddie it's really just a case of looking after him somewhere else rather than having a break, and as it was Kasia's holiday too, then her idea was that I'd spend time looking after Alex. Those of you who have been readers of Tax Watch for a long time know that I like to return from a vacation with a good juicy tax issue or two, but somehow this year there just didn't seem to be any.
Instead, I returned to find some good news on the subject of stock options. Those of you with good memories will remember the extensive series of columns last year on this subject, and the conclusion that if things weren't structured properly, then people receiving stock options could be subjected to double taxation.
The problem can be explained as follows (the eagle-eyed anoraks among you will note the cut-and-paste from my previous column on this subject):
At the date the options are exercised, the option holder goes out into the market, and exercises his right to buy shares today at a price set some time in the past (let's say for simplicity that he buys for 100 when the current market price is 200).
At that point, you've had, by reason of your employment, a benefit in kind by being able to buy shares at preferential price. The valuation of a benefit in kind is the market value at the date of receipt. So by being able to buy for 100 something with a value of 200, you have the difference (or 'spread' in option speak) as taxable income.
Subsequent to the buying of shares, at some point the individual will sell the shares, and maybe realize the capital gain. Here again we have a small tax issue to sort out. The gain on the sale is calculated by deducting cost from proceeds. To go back to our previous example, if the shares are sold for 300, then the gain is 200, being 300 minus the cost of 100.
This leads to double taxation of the 100 of the gain that was already taxed on purchase. The discount was taxed at the time of purchase, but as the law currently stands there is no mechanism to take that into account at the time of selling, and so tax is paid on the discount twice. Until now that is.
Under a new ordinance from the Finance Ministry, the collection of the tax on the discount at exercise has been abandoned for income arising in 1999. This means that the income will only be taxed at the time of sale, and further, that the discount will only be taxed at the time of sale.
There is a condition that this option income must arise from the issue of shares under a resolution of shareholders, but in practice this is almost always the way this would happen in most issuing jurisdictions. (I'm hedging a bit here in case there is a country where it is possible to issue shares without the other shareholders approving the issue, but I can't off-hand think of one).
This welcome change brings Polish tax law into line with most other countries that have special rules for the tax treatment of stock options, none of which tax twice. At the moment, there are still no special incentives to remunerate people in the form of options, but at least taking away the disincentive means that the system continues to improve.
Trying to encourage people to improve the performance of the share price of their employer company by offering incentives to take some remuneration in the form of shares is still some way off. And that's assuming that this continues to be thought of as good practice, rather than encouraging management to do strange things such as borrow money to buy back shares to increase the share price as seems to be happening in other economies, but that's not a tax issue for this column I think.
The ordinance is valid so far only for income arising in the 1999 tax year, which means it is effective back to Jan. 1. It seems likely that this will appear in the law itself next year, which would be even better.
It's not often that I find an opportunity to be positive and uncritical without any cynical side comments, but I think this time it's deserved.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
